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What Is Voluntary Repossession? Everything You Need To Know About Voluntary Repossession Of a Car

What is Voluntary Repossession? How It Affects Your Credit
Kevin Brouillard

Kevin Brouillard

Updated December 21, 2021
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
Having trouble paying your auto loan every month? You’re not alone. In fact, around 1 in 12 people are more than 90 days late on their car payments.  With an auto loan, the vehicle serves as the collateral to secure financing from a lender. If you stop making payments, a lender may have the right to repossess and sell the vehicle to help recoup what is owed on the loan.  When you’re behind on payments, voluntary repossession could be an option to get out from under an auto loan. To help inform your decision, this guide will explain how the process works and the potential financial impacts of voluntary car repo. 

What Happens If You Voluntarily Repo Your Car?

Before giving up the keys, it’s important to know what happens if you voluntarily repo your car.  After the vehicle is turned over and sold, the sale amount goes toward paying down the loan. While this helps reduce the loan principal, borrowers may still owe money and now face the burden of getting by without a personal vehicle.  What’s more, lenders may tack on costs from the vehicle sale to the outstanding loan balance. Voluntary repossession will likely mean a significant hit to your credit score, too.  At the same time, voluntary repo lets the borrower have a say in when and how the car is transferred to the lender. Depending on how far behind you are, the vehicle could be repossessed at any time. Coming forward to hash out voluntary repossession with the lender could avoid a scenario where your car is repossessed unexpectedly. 

How Does Voluntary Car Repossession Work?

When a borrower is in default on their auto loan, they could be at risk of repossession. This is because the loan agreement generally gives the lender a security interest in the car, meaning they can claim the vehicle without notice if a borrower is missing monthly payments or lacking insurance.  To initiate a voluntary repossession, borrowers can contact their lender to let them know they are unable to make their payments and discuss options. If voluntary car repossession is the chosen path forward, the borrower and lender work out the arrangements to exchange the vehicle. 

Voluntary Repo vs Involuntary Repo

Losing a vehicle is not an ideal outcome. But there are some differences when a lender takes back a vehicle by voluntary repo versus involuntary repo.  If a borrower is unresponsive, lenders may resort to involuntary repossession. This can involve hiring a third-party repossession agent to seize the vehicle.  GPS tracking makes it possible for agents to take the vehicle from anywhere at any time, even if it’s on your property. Lenders may also have the right to use a “kill switch” to remotely deactivate a vehicle depending on the loan agreement and state laws. In either case, involuntary repossession can create a stressful and inconvenient situation.  With voluntary repossession, the lender is spared the effort and cost of acquiring the vehicle. This cooperation may help work out a deal with the lender and obtain more favorable terms when refinancing after repossession

The Cost Associated With Voluntary Repossession of a Car

Voluntary repossession of cars may help alleviate the burden of monthly payments, but there are costs to be aware of, too. Here are some ways your finances could be impacted. 

Deficiencies

Once a vehicle is turned over to a lender, they can sell it to get back the remaining loan amount. Borrowers may not be off the hook yet, however, if there is a deficiency balance after the vehicle is sold. This means that the sale amount is less than what the borrower still owes on their auto loan.  With a deficiency balance, the lender has the legal right to determine payment options — whether it be a lump sum or repayment plan. Lenders may also use a collection agency or take legal action to recover what’s owed.  Having a deficiency balance isn’t uncommon with vehicle repossession. Analysis by Consumer Reports found that borrowers owe $3,700 more on average than what their vehicle is worth.

Late Fees

When you fall behind on car loan payments, you run the risk of accumulating late fees. Often, lenders provide a grace period — typically in the 10-day range — to make a monthly payment before it’s considered late. But if you’ve passed that mark, you may have fees start to pile up. Voluntary repossession may also trigger additional fees related to early termination of a lease, towing the vehicle and storing it before auction. 

Bankruptcy

If you’re struggling with debt beyond an auto loan, filing for bankruptcy may be the best option. Keep in mind that doing so could have long-term financial consequences, such as challenges getting a future car loan.  How vehicle repossession fits in will vary based on the type of bankruptcy. With chapter 7 bankruptcy, non-exempt assets, including vehicles, are liquidated to pay debts to creditors. Note that you must meet income requirements to qualify.  Although declaring chapter 7 bankruptcy can get you out of paying any remaining balance after the vehicle sale, any consigner on the loan is still liable for the deficiency. 

Does Voluntary Repo Affect Your Credit?

Any failure to pay a lender according to the terms of a loan agreement can hurt your credit score. Typically, lenders report default to the major credit bureaus when it is more than 30 days late.  Voluntary car repossession will be recorded as a voluntary surrender on your credit report, whereas involuntary seizure of the vehicle will appear as repossession. In either scenario, this will remain on your credit score for seven years, though its impact will wane after a few years if you stay on top of your debt.  While there isn’t a set credit score needed to refinance auto loans, dipping below 660 will make it harder to qualify for prime loan terms.  Still, borrowers with less than ideal credit can explore guaranteed auto financing

How to Avoid a Voluntary Car Repossession

Voluntary repossession may not be the best choice for your finances or personal life. These alternative approaches could help avoid turning over your vehicle to creditors. 

 Refinance Your Loan

Instead of parting with your vehicle, you can try working with your lender to refinance your auto loan despite bad credit. If you’re having trouble with payments, securing a lower interest rate and extending the loan term may allow for more affordable monthly payments.  This means you’ll likely end up paying more interest over the life of the loan, which is why lenders may be agreeable to refinancing before repossession. 

Sell The Car

Lenders can sell the car at a public auction or privately depending on state laws. This is unlikely to fetch the best price, so selling the car yourself may be worth looking into.  Being able to sell your car is complicated by the fact that the lender has a lien on the vehicle since it’s collateral for the loan. You may need to pay off the loan first to get the lien cleared, which is usually challenging if you’re already behind on payments.

Communicate With Your Lender

Reaching out to your lender early on when you’re having difficulties with payments could make the difference in keeping your vehicle. Lenders could be willing to renegotiate your auto loan terms, especially if you let them know early on before late fees start to accumulate. 

Reinstate the Loan

Certain states make it possible to reinstate a loan after vehicle repossession. If your state and contract allow, you’ll need to request a reinstatement quote from the lender that outlines your right to reinstate. This written notice should also state the amount needed to become current on the loan and the deadline for reinstatement — usually 15 days. Unless you can pay this in time, the lender can choose to move forward with selling the vehicle. 

The Takeaway

Voluntary vehicle repossession can have lasting financial consequences. Be sure to work with your lender and consider the alternatives available before handing over your car keys. Refinancing could be a good choice to secure a more manageable monthly payment and steer clear of repossession altogether. Lantern by SoFi can help compare auto loan refinancing options to find an offer that works best for your needs.
Photo credit: iStock/ridvan_celik
The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.SOLC1021225

About the Author

Kevin Brouillard

Kevin Brouillard

Kevin Brouillard is a Returned Peace Corps Volunteer, educator, and personal finance writer. His work has appeared in online publications such as Earth Island Journal, Jetsetter, Oyster.com, and Tripsavvy. Kevin covers an array of financial topics for SoFi, including loans for students and small businesses.
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